DOES A CLIENT HAVE A LIFE AFTER DEATH?

Transcription

1 DOES A CLIENT HAVE A LIFE AFTER DEATH? ADVISORS WHO MANAGE FAMILY MONEY HAVE AN 8 OUT OF 10 CHANCE OF BEING FIRED BY HEIRS AFTER THEIR CLIENT DIES 7 THINGS YOU CAN DO TO BE SURE YOU RE NOT FIRED WHEN YOUR CLIENT DIES. A PRACTICE MANAGEMENT WHITEPAPER SPONSORED BY PREMIER TRUST

2 DO YOU BELIEVE THAT AFTER your clients die you will still have relationships with their heirs? Think again. Advisors who manage family money have an eight in ten chance of being fired by heirs after their clients die, according to a study by Merrill Lynch and Prince Associates. CHANCE OF WHO GETS FIRED AFTER THE CLIENT DIES TRUST COMPANIES ARE LEAST LIKELY TO BE FIRED BY HEIRS As wealthy baby boomers begin to pass away up to $23 trillion dollars in wealth will be transferred from one generation to the next between 2007 and 2026, according to estimates from Boston College s Center for Wealth and Philanthropy. We are currently witnessing the largest generational shift of wealth in United States history. If you don t do anything to keep the next generation in your book of business, you stand a four in five chance of getting fired. Even advisors who have reached out to their clients children and grandchildren through family conferences and oneon-one meetings may find themselves shut out after the estate transfers. The same Prince Associates survey found that fewer than 1% of the people who inherited money from their parents continued to use the same advisor after their parents pass away. What s the single most important step to take right now to keep your clients? Develop strong ties with the trust companies that manage their trusts. Research shows that trust companies are among the least likely of all professional advisors to be fired after a generational transfer. 97% BUSINESS ATTORNEY 95% 91% 86% 97% 44% CPAs Source: Rothstein Kass The TrustAdvisor.com PRIVATE BANKERS RIAS BANK TRUST COMPANY 2 DOES A CLIENT HAVE A LIFE AFTER DEATH?

3 A study by Rothstein Kass found that only 44% of trust companies were replaced after inheritance, about half the rate for business advisors (97%), CPAs (95%), private bankers (91%), RIAs (86%) and banks (86%). This data provides compelling evidence that advisors, wealth managers and others who manage client money, and want to hang onto it when their client dies, need to be involved at an earlier stage in their client s wealth transfer planning process. They need to participate in their client s trust preparation and ongoing administrative process. Advisors can either develop a relationship with a trustee provider, or create a directed trust arrangement, where an advisor can be more certain to hold onto their client s accounts after the heirs parents pass away. Directed trusts are a powerful tool for asset retention These strategies will strengthen your position with current clients and perhaps make their children and other heirs more receptive to your services. However, that may not be enough to enable you to retain assets. The most powerful way to increase asset retention after inheritance is to take an active role in managing your clients trusts. The simplest way to become part of that durable relationship is to assist your clients in establishing directed trusts. A directed trust permits an advisor to have full discretion to choose investments that best meet the trust s objectives; including stocks, bonds, mutual funds, and other marketable securities. The advisor s name is listed in the trust document and can be removed by the trustee only if he fails to meet his or her fiduciary duties. Meanwhile, the advisor hands off the responsibility for administering the trust to an outside corporate trustee. This corporate trustee handles time-consuming non-discretionary tasks like distributing income and capital gains and filing taxes, as well as discretionary tasks like interpreting the provisions of a trust or making decisions that are not explicitly covered in the trust documents. For most advisors finding the right partnering trust firm may not be a simple task. A Directed Trust Insures You Won t Get Fired After Your Client Dies 3 DOES A CLIENT HAVE A LIFE AFTER DEATH?

4 Finding the right directed trust relationship is the sweet spot between spending to run a trust business in-house and turning the business away. The breakthrough came in the 1990s, when some states altered the rules to allow the creators of a trust to direct the trust company to follow the investment choices of an outside advisor. As far as the portfolio is concerned, the advisor (you) is the boss. The advisor earns the management fees. The trust company earns its own fee for handling everything else: accounting, custody (if required), reporting and payments to the beneficiaries. Directed versus delegated trusts Some states welcome directed trusts. In others, the closest you get is a variant called delegated trusts. Some states support both. The words look similar, but in practice, they represent very different ways to break down the responsibility for running a trust. The creator of a directed trust takes the job of managing the assets from the trustee and assigns it to someone else. This generally lets the existing wealth manager keep on doing what he or she is doing, while releasing the trustee from all but the most basic responsibilities over how the money is invested. Delegated trusts give the trustee the power to decide who will manage all or some of the assets. In this kind of relationship, the trustee remains responsible for overall performance and will monitor the outside manager s activities to ensure that all parties meet their fiduciary obligations. Given the choice, advisors naturally prefer to have the trust direct management powers to them, since this usually entails less surveillance and more security that the assets won t be taken away without reason. Whether the trust is directed or delegated depends on the grantor s wishes and the rules of the state in which the trust is set up. Choosing the right partner for your directed trust Not all U.S. states support directed trusts, and in fact some experts consider only a handful of trust centers -- Nevada, Alaska, Delaware, and South Dakota -- to be really top-tier places to create and run a trust. However, anyone from any state can set up a trust in any jurisdiction, so no advisor should feel constrained by what s available at home. Recent trends have led wealthy families and individuals to Finding the right directed trust relationship is the sweet spot between spending to run a trust business in-house and turning the business away. 4 DOES A CLIENT HAVE A LIFE AFTER DEATH?

5 seek out the most favorable environments for their assets. Many large family offices are opting for maximum flexibility when the time comes to decide where to set up the new trust. Even if the prospective trust grantor doesn t need a particular tax benefit or class of protection at the moment, these advisors know that that circumstances change. If multiple generations are part of the equation, the trust must be able to evolve with the family s needs. These are the reasons why many advisors look for a combination of factors when searching for a trust company: Perpetuities. Conventional trusts can expire a few decades or maybe a century after the original grantor dies, but a few states allow property to remain in trust for multiple generations, if not forever. These perpetual trusts or dynasty trusts are a very popular technique for planners and clients today. Favorable tax rules. Avoiding state income or capital gains tax is another key objective for planners to achieve for their clients. Nevada, Alaska, Florida, South Dakota, Texas, Washington and Wyoming do not impose an income tax on trusts. Asset protection. Some states offer varying degrees of protection for locally domiciled trusts from the trust creator s creditors. While the language can be so vague as to be useless in court, jurisdictions like Nevada and South Dakota have a rich body of statute and precedent in place designed to shield property from legal claims. Seven strategies for hanging on to the next generation. What else can you do to skew the process in your favor? How can you increase the odds that your client relationship outlives your client? How can you make sure that your client relationships outlive your clients? First and most important, develop relationships with 1 trust company s administrative trustees and other trust providers so that advisors are a part of the trust relationship. Be sure that you are named as the investment 2 advisor in any successor of transfer instruments such as a revocable living trust or any other trust that provides for client succession planning. Get to know the spouse and children while your 3 client is still healthy. Involve your main client and the whole family in informal meetings to talk about family wealth and values. Add value by providing education to heirs who may not be familiar with investment concepts, and involve them in any major investment decisions. Avoid running into clashes between parent and 4 heir agreements as the client may feel that the advisor is pandering to the heir and that will disregard the advice and the account objectives of the parents. Be empathetic. The emotional toll of having an heir 5 become wealthy immediately means a reassembly of their priorities, life s goals and investment objectives. Distance yourself from the providers that are most 6 likely to be ditched after death. These include the client s business attorney, CPA and private banker. Add value to your service. The advisor and trust 7 provider should offer wealth transfer planning and asset protection to create motivation for the heirs to stay put. 5 DOES A CLIENT HAVE A LIFE AFTER DEATH?

6 Total return trusts. Many states have enacted total return trust or power-toadjust statutes. Trustees in these states can now invest based on a total return approach and satisfy beneficiaries who receive either a share of current income or the principal at a later date. Most states with total return trust legislation have the ability to convert a trust to a unitrust percentage between 3% and 5%. Privacy. Most states have methods for insuring that fiduciary matters will not be a matter of public record, although some are stronger than others. However, state laws differ on beneficiaries entitlement to trust information and only a few states allow a trust instrument to delay or prohibit disclosure of trust information to future beneficiaries. Delegation. Needless to say, you want a trust provider that operates in a state that allows an outside advisor to manage the portfolio.this is not quite as intuitive as it initially seems. Review state statutes permitting segregation of duties to make sure that the trustee will provide exactly the level of supervision you find comfortable -- neither more nor less. CHOOSE A SEASONED PARTNER You can make yourself more valuable to high net worth clients during their lifetimes and retain more assets when they pass on by establishing a relationship with a seasoned trust company. Premier Trust, with 40 team members and more than 150 years combined experience in the trust business, can help you grow and protect your business. Located in trust-friendly Nevada with offices in Las Vegas and Reno, Premier Trust administers trusts only and does not manage investments. Our clients maintain continuity in their investment plans and retain the relationships they have with their trusted investment and financial professionals. We work closely with financial advisors and other professionals, including attorneys and CPA s to help them organize, structure and administer their clients estate plans. If you d like to learn more about how to give your client relationships a life after death, contact us at Tel: (702) Fax: (702) Direct Marketing Phone: (702) DOES A CLIENT HAVE A LIFE AFTER DEATH?